EDITORIAL: The quest for capital injection

Mon, Oct 01, 2012 - Page 8

It is becoming less lucrative to invest in the local stock market, particularly for individual investors, given the heavier cost burden. On Saturday, the Department of Health (DOH) finalized a new and controversial healthcare premium rule that includes getting an extra 2 percent payment from dividend income earned by individual investors.

The latest national healthcare premium package is set to take effect in January after the Cabinet rubber-stamps the health department’s proposal, along with the restarting of a tax on capital gains primarily on profits from stock trading.

Share prices may not see an immediate and significant setback as a result of the new healthcare premium rule because institutional and foreign investors are exempt from allocating a slice of their dividend income. Foreign institutions are the major investors in local stocks, owning more than 33 percent of shares worth nearly NT$7 trillion (US$238 billion) based on a Taiwan Stock Exchange tally last Monday.

However, the estimated increase of NT$20 billion in healthcare premium revenue, which the DOH considers crucial to help save the nation’s crumbling insurance system from bankruptcy for another five years, will inevitably come at the expense of diminishing daily turnover on the local stock markets.

This impact, possibly a gradual erosion, will result from a new wave of retail investors exiting the market as they are vulnerable to a rise in investment costs and the extra payments will further squeeze their profits after the tax on capital gains was approved by lawmakers in July.

Now, there are more reasons to jump ship to more lucrative investment tools. Retail investors own 60 percent of the shares listed on the local stock market. The health department expects more than 3.45 million investors will be affected by the payment rule.

The TAIEX closed up 0.41 percent on Friday with a turnover of NT$86 billion. Turnover has been below the healthy level of NT$100 billion during most trading days since early this year, overshadowed by the capital gains tax.

The likelihood of a significant correction may be slim as the 2 percent levy on dividend income looks insubstantial and there is a NT$5,000 threshold, up from the DOH’s original proposal of NT$2,000.

However, it is certain that the healthcare payment rule will deal a blow to investors’ confidence.

Besides, the latest payment scheme is not fair by any standards, as only retail stock investors have to pay. It is even questionable whether stock dividends should be considered an income as companies pay additional shares via stock splits, which increase the total number of the issuing company’s shares, while lowering the price of each share without changing its market capitalization, or the total value of the shares held.

In other words, stock dividends are not equal to any kind of income, apart from those where the stock price rose prior to a stock split.

Retail investors are not the only group that are going to pay higher fees for healthcare coverage, but also people who earn extra income by taking part-time jobs to make ends meet.

People with annual interest income that exceeds NT$5,000 from their bank saving accounts will have to pay more healthcare premium, including retirees who rely solely on the interest for their living expenses.

The government is seeking a capital injection primarily from ordinary people, adding to the burden they face already trying to make ends meet. The new rule comes at a time when the average monthly wage has stagnated, while living expenses climb amid rising inflation.

It may make the insurance system healthier for a while, but it will sicken the economy.